Bolivia Faces Good Prospects for Economic and Social Reform

Washington, DC: Bolivia's new government, led by President Evo Morales, has a good chance to deliver on its promises to reverse the country's long-term economic failure and help the poor, according to a new report by the Center for Economic and Policy Research (CEPR). The paper, "Bolivia's Challenges," focuses on the country's external sector and assesses its vulnerability to pressures associated with external public debt and debt relief, grants and foreign borrowing, and trade.

Bolivia's new government took office in January with a strong mandate for reform -- to increase economic growth and alleviate poverty. Real GDP per capita in Bolivia is less today than it was 27 years ago and 63 percent of the country lives below the poverty line, despite the country having completed numerous structural reforms advocated by multilateral lending institutions and operating under IMF agreements almost continuously for the last 20 years.

"There is no doubt that the policies of the past have failed," said Mark Weisbrot, co-author of the paper and co-director of CEPR. "The main question is whether Bolivia's new government will be able to pursue economic policies that are potentially more successful -- and I think the prospects are good."

Among the reasons for a positive outlook:

An increase in revenues from natural gas have significantly improved Bolivia's fiscal situation, due to a controversial hydrocarbons law passed last year that increases royalties paid by foreign investors and opens contracts up to re-negotiation. The federal budget deficit for 2006 is projected at 3.0 per cent of GDP, down from 8.8 percent in 2002.

The cancellation of debt from the IMF and World Bank eliminates 36 percent of the Bolivia's external debt. If the Inter-American Development Bank also cancels its debt, then about 70 percent of Bolivia's external debt would be cancelled.

The country's current IMF agreement is set to expire at the end of this month (March 2006). For reasons explained in the paper, the IMF is unlikely to play its traditional "gatekeeper" role for foreign loans and grants.

The impact of trade preferences under the Andean Trade Preferences and Drug Enforcement Act (ATPDEA) -- whether or not Bolivia signs a new Free Trade Agreement with the United States -- is likely to be minimal, as the preferences affect less than 2 percent of the Bolivia's exports.

As a precautionary measure and to help smooth the country's transition to non-concessional and domestic borrowing, the report recommends that the Bolivian government try to arrange a line of credit with the Venezuelan government. Venezuela's lending from its surplus foreign exchange reserves to Argentina and Ecuador has been a very important source of financing for those countries, and will almost certainly be available to Bolivia should it become necessary. Opening a line of credit in advance - one that it is not expected to draw upon in the foreseeable future - would significantly reduce some risks of financial instability.

Another move that could further improve the Bolivian government's short-term and long-term fiscal situation would be to reverse the privatization of the country's public pension system. As noted by the IMF, this privatization has created very large, long-term transition costs, as the income from current payroll taxes is not available to pay current retirees. By returning to a "pay-as-you-go" system as the United States has, the government's fiscal deficit could be substantially reduced.